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Fraudulent profit in form of TDS
#1
This is going to be a long post. But putting all my views into this.

We all are hassled by this perplexing thing called TDS on marketplace fees.
I am breaking this into several parts :
1) What is TDS and applicability on marketplaces
2) My experience and hearsay
3) My issue with Government
4) My issue with Flipkart
5) A broader view

Part I

What is TDS? And why should you care about it?
TDS means Tax Deduction as Source. It is a common mechanism used world over to track incomes of individuals and organisations before assessment by deducting a certain amount from their revenue by the payer and depositing it to the government under the relevant nature of payment (salary, comission, rent etc)
Why should you care?
Any firm covered under audit has to deduct tds subject to certain parameters.

Marketplace and TDS
Many people, including us, never figured that we need to "deduct" TDS on marketplace fees such as comission and courier fees etc and deposit on a timely basis. I have a privilege of engaging with one of the top legal firms in the country. But a common seller does not have this privilege. Marketplaces do not educate about this nor do they ensure its compliance. It is just mentioned in fine lines which no one reads.


The problem with our nature of business with above principle is that we are not making any payment to marketplaces, instead, they are collecting payments on our behalf and reimbursing to us after making deductions of their fees from the collected amount.

We are supposed to deposit tds on this fees and then collect the same back from marketplaces. This completely violates the principle of TDS. Just due to the technicality involved of 194H we are deducting TDS. We are not understanding on the basis of the nature of the transaction.

Part II
So when i started ecommerce, inspite of being a trained chartered accountant, it never struck to me that TDS has to be deposited and claimed in such a way. Basic principles of law are embedded in my mind. But technicality is where I lost.
So it came as a shock to me when my legal advisors pointed this violation to me 6 months into the business.
As a conservative businessman, we immediately complied with the regulations and deposited tds along with penalty.
However, the party whos TDS we had deposited (a marketplace) refused to reimburse the same to us sighting time delay. As we were new and naive, we took this small hit and considered it as an expensive error.
From that day, we made it regular practice to collect invoices and deposit TDS in time bound manner.
However, another shock was there in place for us.
Marketplaces took this money for a ride, and only after lot of efforts we would be able to get this money out from marketplaces.
Seeing this rising burden, cost of follow up, and loss of interest, we stopped this compliance.

Hearsay-
One most shocking thing i heard was from a person who introduced us to this business. Him being a small man who operated from a small place and riding on the ecom wave, as he was not legally enlightened, he never knew he had to comply to something like this technical provision.
The income tax department knocked his doors, and a good 6 digit some was taken in the form of penalty and interest, leaving this particular person in tears and depression as his working capital was wiped out in an instant.

Part III My issue with Government
I know most of the taxation laws by heart. More than a legal approach, mine is an approach of principles. Meaning that laws should be made in the bases of principles. And these principles should be to help the public who have to comply these provisions.

I analysed the entire nature of our transactions and realised that due to technicality of section 194H - TDS on comission has to be deducted on Comission when it is paid or credited which ever is earlier. In our case, we credit the comission in our books, hence we have to "deduct" tds while making "payment" to the payee.

The above is legal definition. Principle that is being violates is that we have to make deduction of this tds from the payment amount. Here we are not making payment to the marketplace, they are making payment to us.

Realising this, as a 21 year old in 2014 i made a document highlighting the above fact and suggesting the changes required to streamline this.

My suggestion was that instead of sellers doing TDS on marketplaces, the marketplaces should TDS sellers while paying, which could be adjusted against sellers income tax at the end of the year.

The detailed document was then emailed to finance ministry, various secretaries therein, CBDT etc.

Funny part is, no one took onus to act on the merits of this document, nor invited me to discuss this in detail. Maybe the government has different priorities. However, it is an issue which concerns a big seller community, and not to me as an individual, hence the government should also take part in understanding our pain.

Almost two years gone by, and this exact principle has been proposed in the recently released draft of GsT albeit applicable on to indirect taxes.

I discussed this in my meeting with MoS Finance, however, no further developments. I had also pursued and given this as a suggestion for budget in 2016.

It would have been a matter of individual pride for me if this small tweak in law would have been done on my recommendation and saved money for lot of small businessmen.

Part IV My issue with Flipkart
In 2014-2015, i had a lot of volume business with Flipkart, even being awarded at seller event for our performance. Also i have given them many inputs to streamline their systems which are still in place today.

After initial setbacks on TDS, we stopped deducting TDS on Flipkarts fees. It was a major issue to all sellers.

However, my legal advisors, asked me to deposit this amount along with interest and penalty while filing my annual return in September 2015.

Till this time, Flipkart had brought in a new policy of not reimbursing any TDS money without a valid TDS certificate.

Due to internal queries in Income Tax Department, i received this certificate in march/april 2016 and same day it was applied in Flipkart for reimbursement.

It was not at all surprising when the minions at seller support refused this claim saying this was of previous year.

So i got it escalated to a very senior person who tried to get this escalated to the right authority in flipkart.

I received this reply on phone, which they refused to give in writing
"We cannot reimburse to you as you are claiming after out cut off date"
I told them clearly that screw your cut off date, governments certificate has come and same day application has been made, you are legally bound to reimburse me. They flatly refused.

Recently, i made a last ditched effort and asked them if this 6 figured sum will be reimbursed to me or not, again the "rules" were sighted to me.
I dont mind bearing this loss. But just for the frustration, i shall be fighting until i receive full amount alongwith interest. Yes i will be adamant on interest. This interest is not i greed, i shall deposit this amount in a fund of Prime Ministers Scemes

Part 6 larger issue, applicable to all marketplaces
I always like to leave people with food for thought.

I was trying to educate on this issue to few industry veterans who are not into ecommerce.

When they came to know about this, they had a 2 hour discussion only on this topic.

They asked me about how marketplaces would be recording this in their books.
It was a very good question and i didnt have a clarity on this.

There were following options:
The outstanding amount could be :
1) Shown as income as they would take credit of this against income tax payable. - then it shows that they are entering a fraudulent transaction with me and making gains on fraudulent means. (Commonly known as 420)

2) Crediting this to my account - they might claim credit of this tds against income tax payable, and show this amount against my account. - in this case, when you admit it is against my account, then, PAY ME, and all the others this very second

3) TDS amount unaccounted - if this is the case, then their auditors have serious answering to do.


Doing a small loss is a part of business. But if this loss profits the other person, and it keeps going on, then it is not worth doing business with such persons.

To end it, i would like all who are reading this to reply to this thread with the amount of TDS claim outstanding against all marketplaces on this given day.

Maybe the numbers will eventually create an impact and understand the gravity of the issue.

Regards,
Kush Agarwal


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#2
Well done Kush. Well written article.Reflexting flaws in India's TDS system and also reflecting how Indian Government still haven't learned, What is marketplace Based Ecommerce.

On the point where you claimed that you have paid TDS and the respective marketplace is denying to reimburse it to you is shocking. Are we living in British Rule?

I am not a C.A or MBA. But I know one thing. In tds we are paying tax on their behalf. And they need to reimburse it to us, SIMPLE.


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#3
I have approached GoI many times on this. At all levels. Maybe my approach must have problems. But will be happy if a change is brought immediately.


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#4
You guys met Minister Of Finance Mr. Jayant Sinha. That itself shows that govt. Is ready for every positive input. I think if we all collectively put this forward we can make a change.

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#5
Great Effort!!!
Well Written Article.
Great indepth analysis and survey!!!
Best of Luck !!!
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  • Kush Agarwal
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#6
Kush : I appreciate you for this article. I was also stuck in the same situation as we were new and did not know how we are liable for deduction of TDS and Flipkart support was not giving a clear cut if they will reimburse the amount or not. They asked us to produce the TDS certificate and then only we will reimburse. But we were in a complete doubt that they will put us in trouble. Therefore, we skipped the TDS and decided that we will not pay it. Now, worry is that what will happen if we will not pay? Whether govt. will ask us for this payment or what?


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#7
Received below email from Flipkart

Quote...

Not to pay TDS for June 2016

Dear Seller,

This is to bring to your notice that we have received NIL WHT certificates (NIL TDS certificate) for Sec 194H, 194C and 194IB for FY 2016-17 from the Income Tax Department using TAN details shared by you.
This means that starting June 2016(or the date mentioned in your certificate), you are now NO longer required to make TDS payments on Flipkart invoices!

The certificate copy will be available for your reference in the seller dashboard at the Payments Tab by first week of July.

Please note: Any TDS payments made after date mentioned in your certificate will NOT be reimbursed.

Hope the above information was helpful.

Warm regards,
Flipkart

Unquote....

I still wounder how can they get TDS exemption.... Confused
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#8
when dis you receive this email ?


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#9
(28-06-2016, 01:29 PM)AARJAY Wrote: You are not allowed to view links. Register or Login to view.Kush : I appreciate you for this article. I was also stuck in the same situation as we were new and did not know how we are liable for deduction of TDS and Flipkart support was not giving a clear cut if they will reimburse the amount or not. They asked us to produce the TDS certificate and then only we will reimburse. But we were in a complete doubt that they will put us in trouble. Therefore, we skipped the TDS and decided that we will not pay it. Now, worry is that what will happen if we will not pay? Whether govt. will ask us for this payment or what?  


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Your entire expense of commission which Flipkart charged you will be disallowed as expense if you do not pay TDS.  Assuming you are under obligation to pay TDS under relevant law.
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#10
But our turnover is far below than 1 crore, is that applicable here ?


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Also we did not pay TDS for April and May 2016, please let us know if we are liable to pay as our turn over is below 1 crore. If yes, then can we pay for June 2016 only or we have to pay for April, May as well. Would they reimburse it if I pay for June only. Please help.


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